Leviathan quandary: Turkey, Egypt or expand production

The field's license limits exports to 6-8 BCM a year under the current development plan.

The government will restrict natural gas exports via pipeline from the Leviathan gas field, according to the license conditions published today. The license requires the partners in Leviathan to keep capacity of 8-10 billion cubic meters (BCM) of gas a year for the domestic market, which leaves it 6-8 BCM a year for exports to other countries in the region. This is an amount of gas sufficient for one anchor customer: either Egypt or Turkey, but not both.

In their response, the partners in Leviathan - Noble Energy Inc. (NYSE: NBL), Delek Group Ltd. (TASE: DLEKG), and Ratio Oil Exploration (1992) LP (TASE:RATI.L) - said that the set-aside exceeded Israel's expected natural gas demand from Leviathan, at least during the gas field's first years of operation.

The choice is between the potential loss of billions of dollars in revenue from gas sales to neighboring countries or the need to invest heavily to expand Leviathan's production infrastructure, which will greatly increase its development cost. The partners' current development plan calls for an initial investment of $4.9 billion for a floating production, storage and offloading (FPSO) ship, which can deliver 16 BCM of gas a year to a pipeline.

The Tzemach Committee on gas exports estimates Israel's gas needs from Leviathan at 2-7 BCM a year during its first ten years of operation. The Ministry of National Infrastructures insisted on keeping a surplus capacity, partly because of the lesson from the Tamar gas field's development for which insufficient capacity was approved, because the ministry did not anticipate the loss of Egyptian gas.

The Ministry of National Infrastructures believes that the reserve capacity is critical for Israel's needs, and insists that this will not prevent development of Leviathan, even if it reduces the partners' profits. The ministry agreed to soften its demand that the Petroleum Commissioner have the right to require the partners to keep gas for an emergency reserve, even if this resulted in violating commitments to foreign customers.

The Leviathan partners objected to both the capacity reserve and the government's demands for future open access to Leviathan's infrastructures to other companies' gas fields, and to a $100 million bank guarantee.

Environmental organizations slammed the Ministry of National Infrastructures' refusal to allow a public hearing on the license. "It is improper that such an important agreement with far-reaching effects and such great public interest is published in its final version without giving the public an opportunity to comment on it," said the Israel Union for Environmental Defense.

In a separate development, the Antitrust Authority will today announce a hearing for the settlement with Noble Energy and Delek Group on their alleged cartel at Leviathan. The settlement requires the companies to sell the Tanin and Karish gas fields, and if their aggregate amount of gas is less than 70 BCM, to sell gas reserves from Leviathan to meet this threshold.

The settlement with the Antitrust Authority, the license, and export taxes are the main issues that have delayed the signing of the agreement to sell 25% of the rights to the Leviathan licenses to Australia's Woodside Petroleum Ltd. (ASX: WPL) for $2.71 billion. The settling of these issues allows the agreement to be signed in a ceremony in Jerusalem on Thursday.

Woodside representatives met top Ministry of Finance officials today to raise their reservations about its tax model for gas exports. Woodside had expected the model to set in advance the guaranteed yield for the floating liquefied natural gas (FLNG) facility that it will build to export gas from Leviathan, but the ministry prefers letting the Tax Authority have the final say in a process for each export contract.

Published by Globes [online], Israel business news - www.globes-online.com - on March 26, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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